Medicaid reform holds promise

By John Hood | Apr 10, 2013

RALEIGH — There are many unknowns regarding the proposal Gov. Pat McCrory announced last week to use competitive contracting to reform North Carolina’s Medicaid program. But what I do know about it suggests the governor is heading in the right direction.

His idea is to award contracts to three or four provider networks that would coordinate and deliver services to poor, disabled, and elderly Medicaid recipients. The state currently uses a single nonprofit, Community Care of North Carolina (CCNC), to perform this task, but it does not bear any financial responsibility if costs come in higher than budgeted. In other states, and in managed-care programs more generally, such at-risk contracts are commonplace.

At a press conference announcing the plan, called The Partnership for a Healthy North Carolina, McCrory and his top aides said that state contracts with the new “comprehensive-care entities” would have a target date of July 2015. They also promised that the new system would streamline state application and billing systems for treatment of physical health, mental health, developmental disabilities, and substance abuse.

The McCrory administration doesn’t have the final word on Medicaid reform, however. The plan will have to pass muster in the General Assembly and receive the necessary waivers from Washington. There may also be unforeseen technical or administrative challenges that delay implementation.

So one thing we don’t know is if the Partnership really will be in place by July 2015. Nor can we know precisely how much North Carolina taxpayers could save from a successful implementation of at-risk managed care. But here’s what is known about the rationale for reforming North Carolina Medicaid:

• We have a relatively high-cost Medicaid program. In 2009, the last year for which comparable national data are available, North Carolina spent just over $6,000 per enrollee on Medicaid payments, plus additional funds for administration and disproportionate-share hospital subsidies. Our program costs were 10 percent higher than the national average and 26 percent higher than the average of Southern states. Our administrative costs are reportedly 30 percent higher than the national average.

• These percentage differences translate into very large dollar amounts. If North Carolina’s Medicaid costs were at the regional average, we’d be spending about $640 million less in state money next year than is currently projected. That’s money that could otherwise be devoted to fiscal priorities such as tax relief or education.

• Unlike some state programs, Medicaid cannot be properly thought of as investment. While spending tax dollars on roads or schools might increase the future growth of North Carolina’s economy, by moving goods more efficiently or making future workers more productive, most Medicaid dollars go to fund acute and long-term care services to elderly and disabled North Carolinians. These are necessary and valuable expenditures, obviously, but they represent consumption, not investment. To the extent state policymakers can provide this medical safety net at a lower cost, through competitive contracting, they can use the savings to enhance the state’s economy through a combination of private investment (via tax relief) and public investment (such as roads and schools).

The current Medicaid contractor, CCNC, is actually a collection of 14 regional networks. It originated as an arm of the state Department of Health and Human Services, becoming a private nonprofit a few years ago. It can and probably will become one of the comprehensive-care contractors under the new system.

Defenders of the current CCNC contract observe that North Carolina experienced the slowest rate of Medicaid growth (3.5 percent) in the country from 2007 to 2010. That’s true, as far as it goes. But this comparison was for Medicaid payments only, excluding administrative cost, and came after many years in which North Carolina had higher-than-average growth in Medicaid costs. Moreover, the program has struggled with unforeseen cost spikes since 2010.

While the development of CCNC may have been a first step toward cost containment, it’s time to take the next step and create financial incentives for coordinating care more efficiently. So far, so good.

Hood is president of the John Locke Foundation, which has just published First In Freedom: Transforming Ideas into Consequences for North Carolina. It is available at JohnLockeStore.com.